Iraq gets "positive" Obama response on Exxon concern

By Aseel Kami and Braden Reddall| BAGHDAD/SAN FRANCISCO

BAGHDAD/SAN FRANCISCO Iraq's prime minister said U.S. President Barack Obama backed Baghdad's concerns over Exxon Mobil's (XOM.N) oil deal with the Kurdistan region and had emphasized Washington's respect for the Iraqi constitution and laws.

Prime Minister Nuri al-Maliki issued the statement as U.S. oil major Chevron Corp (CVX.N) confirmed its purchase of 80 percent of two blocks in Kurdistan in a move that may infuriate the central Iraqi government, which wants all oil deals to pass through Baghdad.

Baghdad is embroiled in a deep dispute with the autonomous Kurdish region over energy exports and has asked Obama to stop Exxon exploring for oil there, saying it could threaten stability. On Thursday it welcomed Obama's written response.

"We would like to confirm that the letter was positive and convincing and stresses its respect for the constitution and Iraqi laws, in the same manner as the Iraqi government is seeking," a statement from Maliki's office said.

"The Iraqi government will take all necessary measures in applying the law and will not allow the company to implement these contracts," it said, referring to the deals signed with Kurdistan. Exxon declined to comment.

An industry source familiar with U.S. oil operations in Kurdistan said the Obama administration was continuing to discourage firms from moving into the northern region, the government of which is based in Arbil.

"Washington is saying, 'This is a bad time to go into Kurdistan, given the sabre rattling between Baghdad and Arbil,'" the source said.

Kurdistan said in June that it expected more oil majors to follow Exxon in the next few months in striking deals there.

France's Total (TOTF.PA) has already said it was interested in investments in the region, drawing a veiled threat from Baghdad which said French companies should avoid unsanctioned oil deals.

Exxon became the first oil major to move into the northern region in mid-October when it signed a deal with the Kurdistan Regional Government (KRG). Apart from Total, Norway's Statoil (STL.OL) is also looking closely at KRG exploration deals, industry sources have said.

"People are looking at the commercial terms on offer in Kurdistan and they're voting with their feet," said a senior Western oil executive.

"The margins on Iraq's service contracts are slim and Arbil is offering more lucrative production sharing deals."

CHEVRON SEES "PROMISE"

Chevron, the second-largest U.S. oil company, said it sees "considerable promise" in Kurdistan. It is purchasing the Sarta and Rovi blocks from India's Reliance Industries Ltd (RELI.NS), where it will be the new partner of Austria's OMV AG (OMVV.VI) - holder of the other 20 percent interest.

Though it chose not to participate in Iraq's four oil and gas licensing rounds, Chevron said it would still monitor opportunities in both the north and south of the country. It was the first big oil company to offer Iraq technical assistance and training following the U.S.-led invasion.

"The opportunities in Iraq's licensing rounds didn't compete in Chevron's investment portfolio," said an oil industry source. "The commercial terms in Kurdistan were attractive, an opportunity presented itself and Chevron moved on it."

The U.S. major has advised Baghdad of its Kurdish deal and is in the process of setting up an office in Arbil, he said.

An Iraqi oil ministry spokesman declined to comment directly on the Chevron deal on Thursday but repeated Baghdad's warning to foreign energy companies.

"The government attitude is clear. Contracts signed outside the framework of the federal government are considered as illegal," Assim Jihad said.

Iraqi oil industry sources said Baghdad might strike hard against Chevron, going further than just barring it from oil and gas investment projects. Chevron has a contract to buy 167,000 barrels of Iraqi oil per day, which Iraq could seek to cut in protest, they said.

At the same time as punishing those dealing with Kurdistan directly, the central government could also reward other companies developing Iraq's giant southern oilfields by improving commercial terms, the sources said.

The dispute over oil exports is part of a broader clash between Iraqi Arab-led central government and the Kurdish government over territory and regional autonomy that many see as a potential flashpoint for conflict since the last American troops left Iraq in December.

OPEC-member Iraq holds the world's fourth-largest oil reserves and is expected to be a major source of future oil supplies.

Eager to rebuild its dilapidated infrastructure, it has signed a series of contracts with foreign oil companies that target total oil production capacity of 12 million barrels per day (bpd) by 2017, up from about 3 million bpd. Most analysts see 6 million to 7 million bpd as a more realistic goal.

(Additional reporting by Raheem Salman in Baghdad, Peg Mackey in London and Anna Driver in Houston, Writing by Sylvia Westall, editing by William Hardy and Anthony Barker)

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